The London Stock Exchangeâs position as the largest stock market in Europe has made it the main target for the new breed of trading systems looking to take market share.

The LSEâs Dame Clara Furse

Exchange chiefs

The exchange has responded to the threat of competition in two key ways however, by funding and delivering in June last year a new equity trading platform TradElect, and by buying Italian exchange group Borsa Italiana to diversify its business into derivatives and post-trade services.

One year on from the €1.6bn ($2.2bn) takeover of the Italian market, a key focus for the LSE Group is integrating the two businesses which involves moving some of the various divisions of Italian exchange group to the TradElect platform. This is crucial if LSE is to realise the annual £20m (€25m) of cost-savings it pledged when the merger was proposed in June 2007.

One of the first milestones in the project was the switch of the Italian equities trading platforms MTA and Expandi to TradElect, something the UK exchange said in June would take place this month, subject to customer readiness, creating what it claimed to be “the largest European equity pool”.

The understanding among the new trading platforms was the migration would be completed on Monday this week, but the LSE said last week that it had decided “to reschedule the launch date to Monday October 13”.

The announcement frustrated the LSE’s emerging rivals, such as Chi-X and Turquoise, which need the migration to take place before they can start trading Italian stocks.

Peter Randall, chief executive of Chi-X Europe, said last week: “Every day a monopoly fails to open up to competition is a day when the consumer loses and the monopoly wins.”

The exchange denied that the Italian migration to TradElect date had been delayed, however, suggesting the date had been changed “to allow customers more time to deal with testing, given the recent crisis in global financial markets”.

A spokesman for the exchange said: “All the dates we gave for the migration were provisional and we made it clear they were subject to customer readiness.”

Some customers, however, still have questions, mindful of the events of three weeks ago when the LSE was forced to suspend trading for seven hours on one of the busiest days of the year, its first major systems issue since April 2000. But David Lester, the chief information officer at the LSE, dismissed these questions, adding: “The integration is going very well”.

Lester, who joined the exchange in 2001 from management consultants Accenture where he worked for seven years, said he had divided the LSE-Borsa Italiana integration project into 15 parallel streams including trading systems, information systems, derivatives and post-trade services.

He said: “The trading-systems stream is made up of two phases. Firstly, we are migrating the Italian equities trading markets MTA and Expandi from the Italian platform Affari to TradElect on October 13, followed by the migration of the Italian securitised derivatives and retail bond MOT businesses targeting the end of the first quarter of next year.”

Lester said the LSE had split this stream into two phases because the more esoteric securitised derivatives and retail bonds required additional functionality beyond equities. He added his team was working on TradElect to “ensure a smooth migration”.

The LSE Group is also making progress bringing together the respective data systems of the UK exchange and Borsa Italiana, according to Lester.

He said: “The group’s information services are supported by Infolect and the Italian system by MDF/DDM Plus, and we will continue to support both systems until the middle of next year when MDF/DDM Plus will be decommissioned and all customers will receive data from Infolect only.”

The exchange group is less clear about its plans in other areas, principally derivatives and clearing.
The LSE’s derivatives trading system EDX and Borsa Italiana’s IDEM run on the Click trading platform from rival exchange Nasdaq OMX, so the markets could easily merge on that system, but Lester is weighing his options.

He said: “TradElect has been designed as a multi-asset class system, so we could add the necessary derivatives functionality but we are considering our technical provision to support derivatives. We are still working on our overall plan for derivatives.”

Similarly, the LSE has yet to finalise its plans for post-trade clearing and settlement services.

The LSE has long been a fierce advocate of competition between clearing houses and last week put its money where its mouth is, announcing a plan to enable its members to choose between clearing houses for the first time, a move that will break a UK equity clearing monopoly held by Anglo-French clearer LCH.Clearnet.

Banks and brokers trading on the LSE will be able to opt for clearing through LCH.Clearnet or Swiss clearing house SIS x-clear when the link is live, though the LSE did not say when this would be.

The LSE plans to use the Italian system X-TRM to manage UK equity orders between the rival clearers, while that system will continue to handle messages between the Borsa Italiana and its clearing house CC&G, which is wholly owned by the Italian market.

The LSE is circumspect when it comes to its broader plans for CC&G, however, particularly whether it will develop the Italian clearer to handle UK equities, a move that would effectively pitch CC&G into competition with the clearing houses that support its parent.

The exchange said in a statement last week: “The group will pursue the international development of its post-trade assets, which already offer service and efficiency levels not matched elsewhere in Europe.

"It will develop the scale and scope of these services by leveraging its skills and capabilities to support its international growth and the group’s product innovation initiatives across its diverse range of asset classes.”

Lester said the exchange was conducting an “ongoing review of post-trade services”, adding: “The development of Italian clearer CC&G to handle UK equities is an option but we are still considering this.”

Lester is more confident, however, that the October 13 migration of the Italian systems to TradElect, which currently runs at a speed of 4.6 milliseconds a trade with a capacity of 12,000 messages a second, making it one of the most preferred European equity systems, will benefit the Italian equities market.

He said: “It is going to be interesting to see what TradElect, together with the London liquidity pool, does for the Italian equities market and whether it helps that market to develop in the same way TradElect has boosted the UK business, by allowing the participation of new types of players for the first time, which should lower spreads and make the market even more efficient for traders and listed companies.”

The LSE Group is making progress integrating the UK and Italian equities businesses but it could yet be its smaller derivatives and clearing units that best position it for the future.